7 Things to Do When the Stock Market Tanks: How to Handle a Downturn
You invested in mutual funds and index funds hoping to ready yourself for retirement. But then the bottom dropped out of the market, and your investments went with it. It felt as if someone punched you in the gut, and you are wondering if investing is really worth it.
First of all, welcome to the club. Many have been exactly where you are. Second, before you sell all of your investments, let’s look at 7 things you should be doing when the stock market tanks:
1. Remain calm. Take a look at this chart. Dips are nothing new to the stock market. It goes up, and it goes down. You knew that investing was not risk-free. And the worst thing you could do now is make erratic decisions.
2. Don’t make any emotionally driven decisions. If you find yourself emotionally charged by the drop in the market, step away from the computer. The temptation to sell your mutual funds and walk away from the market is all too common during down times. But often, these decision end up hurting you in the long run. Remember, investing is about weathering the ups and downs that inevitably occur over time. So instead of selling your mutual funds, keep steady.
3. Keep steady. Keep investing in your retirement accounts. If you have amounts automatically withdrawn from your paycheck, do not reduce them. The beauty about down markets is that everything is on sale. You now get to buy mutual fund shares while they are cheap. You may have heard of the term “dollar cost averaging.” The premise is that you regularly purchase investments whether the market is high or low so that you reduce your overall risk. If you always buy when the market is doing well, there is less room for growth and more room for loss.
4. Maybe invest some more. Since everything is on sale, why not purchase some more? This counterintuitive thinking can be of significant benefit to you over the long run. You always hear, “Buy low.” Well, now you can. Seriously consider purchasing a few extra shares of your mutual funds.
5. Check out your current mutual funds. How did your investments favor during the downturn. Were they close to mimicking other mutual funds that were supposed to be similar in their holdings? Did your growth fund perform the same as other growth funds? Did your international fund perform the same as other international funds? Also, compare funds during periods when the market was doing well. If you notice that your fund is doing worse than other, similar funds, it may be time to adjust your investment.
6. Don’t always go with the crowd. Don’t assume that everyone knows what they are doing. After 2008, I watched several friends shift all of their retirement investments from mutual funds to money market accounts. Sadly, a large portion of them missed out on one of the greatest market runs we have had.
7. Stay focused on the goal. You knew that the market would have ups and downs. You knew it was a risk. But you invested anyway. Why? Because you knew that you needed something more than a savings account or CD to get you to retirement. Remember the goal. Do not get caught up in the emotions of the day. Stay focused.
They way you react during market downturns could have significant ramifications down the road. Remain calm and stay focused on the goal. Sometimes investment adjustments are needed, but they should never occur because momentary emotions. Your ability to weather storms may be the difference between postponing retirement and being retirement-ready.